Part 1A swap agreement calls for Durbin Industries to pay interest annually, based on a rate of 1.501.50% over the one year T-bill rate, currently 7.007.00%. In return, Durbin receives interest at a rate of 7.007.00% on a fixed-rate basis. The notional principal for the swap is $ 50,000$50,000. What is Durbin's net interest payment for the year after the agreement?Part 2
A. $ 3,500$3,500. B. $ 750$750. C. $ 4,250$4,250. D. $ 2,125$2,125.

Question

Part 1A swap agreement calls for Durbin Industries to pay interest​ annually, based on a rate of 1.501.50​% over the one year​ T-bill rate, currently 7.007.00​%. In​ return, Durbin receives interest at a rate of 7.007.00​% on a​ fixed-rate basis. The notional principal for the swap is $ 50,000$50,000. What is​ Durbin's net interest payment for the year after the​ agreement?Part 2
A. $ 3,500$3,500. B. $ 750$750. C. $ 4,250$4,250. D. $ 2,125$2,125.

BlackTom AI · Accepted Answer

We start by identifying the cash flows in the swap for Durbin Industries. Durbin pays a floating rate of 1.5% over the 1-year T-bill rate, which is currently 7.0%. Therefore, Durbin’s short (paid) rate = 7.0% + 1.5% = 8.5% on the notional.
Durbin receives a fixed rate of 7.0% on the notional.
The net interest payment by Durbin equals the difference between what Durbin pays and what Durbin receives, multiplied by the notional principal:
Net payment = (8.5% − 7.0%) × $50,000 = 1.5% × $50,000.
1.5% of $50,000 = 0.015 × 50,000 = $750.
Now evaluate the answer choices:
- A. $3,500: This would imply a net rate of 7.0% or a larger differential than 1.5%, which does not align with the calculated 1.5% net. The number is too large to be explained by the 1.5 percentage point spread.
- B. $750: Matches the computed net payment of $750 from the 1.5% net rate on $50,000.
- C. $4,250: This would correspond to a net rate of 8.5% on $50,000, which would require a different interpretation (e.g., paying 8.5% without offsetting 7.0%), inconsistent with the given cash flows.
- D. $2,125: This would reflect a net rate of 4.25% on $50,000, which does not fit the described 1.5 percentage point differential.
In summary, the correct net payment per the described swap terms is the 1.5% differential applied to the notional of $50,000, yielding $750, which aligns with choice B.

Homework:Chapter 14 Homework

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